Corporate Restructuring - Session 2.pdf

Corporate restructuring is a critical process that organizations undergo to realign their structure, operations, or finances to better meet their strategic objectives. In today’s rapidly changing business environment, restructuring has become an essential tool for companies to maintain competitiveness, enhance profitability, and adapt to market demands. Whether driven by financial distress, shifts in market dynamics, or the pursuit of growth, corporate restructuring can take various forms, including mergers and acquisitions, divestitures, debt restructuring, and organizational redesign.

The primary aim of corporate restructuring is to improve the overall performance of the company. It often involves reassessing the company’s assets and liabilities, workforce, business units, and market position. By realigning these elements, companies can achieve greater efficiency, reduce costs, and focus on core competencies. Restructuring can also be a proactive strategy to capitalize on emerging opportunities or to stave off potential threats in a competitive landscape.

However, corporate restructuring is not without its challenges. The process can be disruptive and may involve difficult decisions, such as downsizing or divesting non-core assets. Additionally, restructuring requires careful planning and execution to minimize risks and maximize the intended benefits. Stakeholder management is crucial during this process, as employees, investors, customers, and creditors may be affected by the changes. Clear communication and transparency are vital to maintaining trust and support throughout the restructuring process.

In the globalized economy, where market conditions and consumer behaviors are constantly evolving, corporate restructuring is often seen as a necessary step to ensure long-term sustainability. Companies that successfully navigate restructuring can emerge stronger, more agile, and better positioned to thrive in a competitive environment. However, the success of restructuring efforts hinges on a thorough understanding of the company's current state, a clear vision for the future, and the ability to execute the necessary changes effectively.

1. Corporate
Restructuring

2. oSettingspecificshort&long-termobjectivestobeachieved
throughrestructuring,
oPlanninggrowthscenariosafterrestructuringinadvance,
oDefiningcorebusinessesandfocusingonthem,
oDevelopingarestructuringplantowardsuperiorshareholdervalue,
oDemonstratingleaders'commitmentstorestructuring,
oSharingarestructuringplanacrossthegrouporganizations,
oSettingobjectivecriteriatoidentifycandidatesforrestructuring
oAssessingrestructuringalternativesandselectingthebestoption,
oFindingtherightpartnerstocompletethetransactions,
oExecutingrestructuringinaswiftandintensivemanner,
oMonitoringtheprogressofarestructuringplanonaregularbasis,
oInvolvingexternaladvisorsintherestructuringprocess.
Successful Restructuring

3. Organizationscouldbenefitbyrestructuringbeforetheyarehitwitha
crisis;apreemptiverestructuringmayoftenbeappropriate.Ifan
organizationwaitstoolongtoaddressproblemswithitsbusiness,the
resultingrestructuringmaybeverypainfulastheoptionsremaining
willdefinitelybefewer.
Apreemptiverestructuringmaydeterexecutivesfromtakingthefull
measuresthatarenecessarytoreturnthebusinesstoasoundfooting
whereasaresultingrestructuringmayseverelydisruptthebusiness.
If,forexample,itisnecessarytolayoff20%ofyourworkforceto
achievethesamecostefficiencyasyourcompetitors,bettertodothis
overseveralyearsthanallatonce.Thekeyistorecognizethe
problemasearlyaspossible.
Organizationsmustperforma"restructuringaudit"ontheir
businessesperiodically,lookingforopportunitiestocreatevalueby
voluntarilyrestructuring,beforecircumstancesleavethemwithno
choice.
Preemptive
Restructuring
Preemptive restructuring
can act
as
a
deterrent
to
painful surprises
down the
road

4. Preemptive
Restructuring
oWhatistheorganization’scorebusiness
(Units,products,servicesandcustomers
thatbringcashintothebusiness)?
oHowshouldtheredesignedorganization
looklike?
oIstheorganizationefficientlyfunctioning
anddoesitobtaintruevalueformoney?
oHowistheemploymentbrandmanaged?
oCouldproposedmeasuresdamagethefuture
businessstrategy?
oWhatstepsshouldbetakensothatkeytalentisretained?
oHowisthedevelopmentofstaffcontinued
whilstrestructuring?
oWhatisthemarketimpressionabouttheorganization?
oIstheapproachtorestructuring
consistentwiththeorganization’s
declaredvalues?
oAreeffectivecommunicationplansin
place?
oIsmanagementengagingwithstaff
inanappropriatemanner?
oHowdoesstafffeelaboutbeingpartofthe
organization?
Adding Value Balancing Short & Long Term Risks
Engaging Effectively with
Staffs
Preemptiveornotrestructuringinitiativesfailwhenissuesare
overlookedorapproachesundertakenareunrealistic.Key
pointstheBoardofDirectors(BOD)shouldconsiderbefore
restructuring:

5. Cash Reserve
PriortoRestructuring:
1. Makesurethatthattheorganization’sowners,leadershipteam
anddirectorsare personallyprotected.
Whentheorganizationisintroubleorunderrestructuring,itis
vulnerabletolawsuitsfromcreditorsandotherswantingtocashin
onitsdistress.Theorganizationshouldmakesurethatitstop
leadersareprotectedbyaDirectorsandOfficerspolicy.
Realestateplanningshouldbeencouragedtohelpprotectpersonal
assetsagainstpersonallawsuits.Byknowingthateveryoneis
“safe”,theorganizationcanfocusanddevotealleffortsagainst
restructuring.
2. Overseeallcashcollectionsandpayments.
TheCEOmusttakecompletecontrolofcash(how,dependsonthe
sizeandexistingstructureoftheorganization).Ifcashiscontrolledit
cannotbeoverspent.

6. The
Restructuring
Process

7. Ascompaniesarecomingundermorepressuretocreateshareholdervaluetheywill becomeengagedindivestituresofunderperforming
businessunitsorsubsidiaries.
Thepatternofatypicalcorporaterestructuringprocess:
1.Thepatternofatypicalcorporaterestructuringprocesscallsforanorganizationtostabilizeitsfinancial
situation,returntoprofitandthenfocusongrowth.
2.Ifcompaniesincurexcessivedebtsandsufferfromdeterioratingcashflows,short-termmeasureswillneedto
betakenimmediatelytogeneratecashfordebtpaymentsandstabilizethefinancialsituation.
3.Toreleasecash(andthusreducedebts),organizationscansellofffixedassetsorunderperformingbusinesses
andrationalizeworkingcapital,e.g.,acceleratedebtorcollections,extendcreditorpaymentsorreduce
inventories.Thepriorityinthisphase(financialrestructuring),istostabilizefinancialsituations.
4.Inparallel,companieswillneedtostrengthentheircorebusinessessothattheycangenerateenoughcash
tofinancesubsequentgrowthinitiatives;nogrowthinitiativescancommencewithouthavingstrongcore
businesses.
5.Toimproveprofitabilityincorebusiness,companiesmustredesignandstreamlinebusinessprocesses.
Sucheffortscanbeextendedtotheentiresupplychain;businessrebuilding.
6.Thisinvolvesthewholerangeoftheorganization’sbusinessactivities,includingstrategiesandindividual
businessprocesses(financialandoperationalrestructuring).
Cash isKing! Determine what generates cashand what drainsit.

8. Ascompaniesarecomingundermorepressuretocreateshareholdervaluetheywill becomeengagedindivestituresofunderperforming
businessunitsorsubsidiaries.
7.Whenorganizationshaveimprovedtheefficiencyoftheircorebusinessessufficiently,theyarepoisedtoshift
emphasisfromshort-termprofitabilitytolong-termprofitablegrowth.
8.Tosustaingrowth,companiesneedtolaunchnewproductsanddevelopnewmarkets;value-buildinggrowth.
Growthinitiativesusuallytakeseveralyearstoyieldresults.
9.Consequently,companieswillneedtoconsiderfront-loadingofgrowthinitiatives.
10.Inmanycases,businessrebuildingandvalue-buildinggrowthtakeplacesimultaneouslyratherthanoneafter
theother.
11.However,unlessthecompanyundergoesorganizationalrestructuring,itismorethanlikelythatthe
inefficienciesthatforcedthecompanytoundergofinancialrestructuringinthefirstplacewillsurfaceagain.
Ongoing organizational restructuring is amustfor every company

9. Ascompaniesarecomingundermorepressuretocreateshareholdervaluetheywill becomeengagedindivestituresofunderperforming
businessunitsorsubsidiaries.
AlternativeDivestitureStructures:
oTherearethreebasicwaystodivestasubsidiary:sell-off,equitycarve-outandspin-off.
oOthermethodsofdivestingasubsidiaryincludecorporatesplitsandtrackingstocks.Corporatesplitsare
commonlyusedtoeffectintra-groupcorporaterestructuringsandtoprepareabusinessfordivestiture.
oAtrackingstockisaspecializedoptionforaparentcompanytorealizehiddenvalueinabusinessunitor
subsidiarywhileretainingcontroloftheunitorsubsidiaryconcerned.Moreover,aspin-inistheacquisitionof
minoritysharesinmajority-ownedsubsidiaries.
oConsequently,majority-ownedsubsidiariesbecomewholly-ownedsubsidiaries.
oInmanycasesspin-insareexecutedwiththeaimofimplementinggroup-widerestructuringandarefollowed
byfurtherdivestitures.
oLastbutnotleast,ajointventurecanbeusedasameansofacquiringorexitingabusinessintwostages.In
thefirststage,aparentcompanyanditspartnercompanycreateajointventurecompany.
Basicways to divest are Sell-off, Equitycarve-out,Spin-off

10. Ascompaniesarecomingundermorepressuretocreateshareholdervaluetheywill becomeengagedindivestituresofunderperforming
businessunitsorsubsidiaries.
oInthesecondstage,theparentcompanysellsitsremainingsharesofthejointventuretothepartneraftera
certainperiodoftime.
oToachievevalue-buildinggrowth,companiesmustdevelopandmaintainbalancedbusinessportfolios.
oNogrowthcanbeachievedwithouthavingstrongcorebusinesses;cashflowsgeneratedbycorebusinesses
areessentialtofundforgrowthinitiatives.Yetstrongcorebusinessesalonedonotguaranteevalue-building
growth.
oTodevelopandmaintainbalancedportfolios,thechallengeistonurturepromisingoptionswhilereviewing
frequentlythegrowthpotentialofeachbusinessanddivestingquicklyunderperformingbusinesseswith
diminishingpotentialordistractingnoncorebusinesses.
oGrowthinitiativescallforfunds,managementtimeandotherresources.
oDivestituresofunderperformingornon-corebusinessescanoftenreleasetied-upresourcesandthuscan
createcapacityforgrowth.Thetwocornerstonesofsuccessfuldivestituresare:
1.Deliberateuseofinterimsolutionstoaneventualexit;and
2.Layingthegroundworkforcreatingastand-aloneentity.
Strongcore business alone doesnot guarantee value-building growth

11. Ascompaniesarecomingundermorepressuretocreateshareholdervaluetheywill becomeengagedindivestituresofunderperforming
businessunitsorsubsidiaries.
Themethodologyofrestructuringisbasicallybasedonastrategicplanningprocess.Thisconsistsofthreephases:
A.TheDiagnosticPhase:DiagnosisofthecompanythroughStrategicAppraisalandDueDiligence(Financial,
Operational,Macro-Environment,Legal).
B.ThePlanningPhase:PreparationoftheStrategicImprovementPlan.Definecorporateobjectivesand
strategies.
C.TheImplementationPhase:Restructuring,includingmonitoringofprogressandrevisionsofthe
previousphases.
Important:
oRestructuringismorelikelytobesuccessfulwhenmanagementfirstunderstandsthefundamental
business/strategicproblem(s)oropportunitythattheirorganizationfaces.Thedecisionsthatmanagementwill
havetotakeaspartofimplementingarestructuringplanarecriticaltowhethertherestructuringsucceedsor
fails.
oTimeisofessence&Peopleneedcertainty.
Management commitment tothe processis critical.

12. The Restructuring
Process chart
Asst Prof. LAVANYA MANOJ
MANAGEMENT STUDIES